Let me start off by saying I love Fawlty Towers and consider it one of the greatest shows in history. If you're reading this, you're probably already a fan and don't need me to say much about the show. However, I wanted to comment on this episode because I notice it tends to polarize fans. So I wanted to analyze it a little bit.
Many people, including myself, dislike this episode because of how unpleasant the Mr. Hamilton (Bruce Boa) character is. On the other hand, I've met many who love the episode for exactly the same reason. I can't help but wonder if there are cultural reasons for this; if we were to poll the fans, would it be mostly Americans who had a problem with the character and non-Americans who didn't? It's an interesting point to consider; Hamilton represents every horrible American stereotype there is, and I suppose Cleese deserves credit for being so merciless. But I think the result is uneven and the episode would've been better had the character not been so mean and vicious.
Many of us leave the episode feeling angry at Hamilton and feeling bad for Basil. Hamilton is different from just about every other guest character on the show. Mrs. Richards, the semi-deaf guest in "Communication Problems," was also a guest from hell, but she was annoying in a funny way. Put Mrs. Richards in any other situation outside of Fawlty Towers and she would've brought her humor with her. You can apply this to all the guest characters: most of them are eccentric and irritate Basil in a humorous fashion. But Hamilton is simply a bully and he starts pushing Basil around literally the moment he enters the hotel and even threatens violence when things go badly. Basil, ever the kiss-up to this apparently wealthy guest, just takes it. The problem is that this set-up does not automatically invite humor; Hamilton is not funny and Basil squirming and making wisecracks becomes the source of the comedy. Compare this to the situation in "The Hotel Inspectors" where Basil, believing the guest might be a hotel inspector, initially kisses up to him, only to fail in various funny/embarrassing situations, and then upon learning the guest isn't, turns vengeful. That was funny. Here, Basil just gets bullied and continues to take it.
It doesn't help that Polly and Manuel are barely in the episode, and thus Basil must carry all of the humor himself. I won't deny that there's a lot of humor in the middle-section of the episode, as Basil struggles to make the dinner amidst confusion, and says the classic line: "I'm afraid we're out of Waldorfs." But again, I find myself feeling bad for Basil (even though I know the character is traditionally a jerk and deserves what he gets) because Hamilton is simply being unfair in making unreasonable requests (ordering dishes that aren't on a menu, saying "What the hell is this?" when he gets canned orange juice even though he never asked for it to be freshly-squeezed) and showing rage at any conflict. I just rewatched the episode and was taken by how much anger he shows just in placing his order; he yells "I want a Waldorf Salad" like a child throwing a tantrum and grabs the table knife as if it were a violent weapon! Later he threatens violence against a chef he's never even met!
Finally, it all climaxes with a scene where Hamilton cruelly humiliates Basil in front of all the guests. It's one thing to have all the guests comment on their dissatisfaction, but even then Hamilton orders Basil to stay put and listen to them or else he will "bust his arse." Man, he's showing an unusual level of sadism and even peanuts Basil's tie afterward to laugh at him like a schoolyard bully. Of course, Basil deserves this since he generally treats his guests horribly (the first 5 minutes of the episode do a great job of showing what horrid service Fawlty Towers gives its guests), but watching him get it from Hamilton seems cruel and, worst of all, not funny. It should be mentioned that almost every episode ends with Basil "losing" in some way. Who can forget the wonderful comic endings of "Gourmet Night," "The Wedding Party," and especially "Communication Problems," all of which end with Basil left in frustration, made funnier by all the efforts he has been making to the contrary. Again, those situations create comedy because of how they've been set up. But just watching Basil (no matter how much deserves it) be humiliated by another mean character in a very cruel way simply isn't funny. What makes it funny is Basil going off on a rant about Nazi Germany and then checking himself in as a guest, but this only further proves my point: the Hamilton character is unpleasant and does not invite humor, and it is only Basil on his own that brings in the joke.
Ultimately, I watch Fawlty Towers to laugh, not to feel angry at the characters afterward. I'm relieved to find others feel the same way and comment that Hamilton brings a certain "darkness" to the episode. I also saw a comment on the Wikipedia article for this episode that summed up the problem perfectly: "The episode makes it ambiguous whether Basil or Hamilton is the antagonist." In any case these criticisms of this one episode do not overshadow the greatness of a fantastic series that will live on.